Sovereign Africa Ratings

South Africa re-entered the domestic sukuk market on Wednesday, 22 November 2023, with the issuance of The ZAR Al-Ijara Sukuk, valued at R20.4 billion. This financial instrument operates on Sukuk al-Ijara principles, involving the temporary transfer of usufruct, the legal right to use and benefit from an asset. The sukuk intends to handle a borrowing gap, consistent with the government's fiscal year strategy.

This strategic approach is consistent with the government's efforts to resolve a $2.6 billion borrowing shortage for the current fiscal year. The auction drew a lot of attention, with total orders exceeding 35.5 billion rand ($1.9 billion), prompting the government to issue 20.4 billion rand in debt across various tenors.

Following South Africa's first Islamic bond sale in 2014, which was listed overseas, the newest sukuk offering had four tranches with varied maturity dates ranging from March 2029 to March 2036, with profit rates ranging from 9.87% to 11.9%. Notably, this was South Africa's first issuance in local currency, with a target of R20 billion subject to demand.

Notably, whereas the 2014 sukuk was denominated in dollars, this year's sale was South Africa's first in local currency. The National Treasury set a target of R20 billion ($1.1 billion), with the option of increasing the amount dependent on demand. This move is significant since South Africa has had difficulty accessing international loan markets since April 2022, owing to rising global interest rates.

The market reaction suggested significant local bank participation, raising doubts about the offshore market's desire for a rand-denominated sukuk. Concerns remain about foreign buyers hedging currency risk, which might have an impact on the net dollar yield. Pricing guidance for different tenors reflected varying terms, and the market experienced some volatility before to the sale.

The worldwide sukuk market slowed in the third quarter of 2023, owing to the slower summer months. Higher oil prices decreased financial requirements for some GCC sovereigns, altering market dynamics. Despite this, the worldwide sukuk market is expected to rise from USD 754.93 billion in 2022 to an estimated USD 973.25 billion in 2023, representing a strong compound annual growth rate (CAGR) of 28.9%.

The government hopes to attract new investors, both domestically and globally, interested in ethical and Sharia-compliant prospects by delving into Islamic financing. This diversification strengthens the financial system by lowering the risks associated with traditional financing techniques.

South Africa's sukuk issuance is a strategic endeavour to diversify funding sources in the face of global debt market problems. This initiative's success will be determined by variables such as recruiting a diversified investor base, successfully implementing sukuk-funded projects, and overall economic performance. The proceeds designated for important infrastructure projects are in line with the country's long-term development goals, demonstrating a commitment to ethical and Sharia-compliant financing practices. As South Africa navigates the sukuk landscape, the outcomes may have an impact on the country's credit rating, perhaps boosting economic growth and financial inclusion.